Segmentation Comes of Age

Financial institutions have been using customer data for segmentation purposes for many years in order to target customers for more efficient marketing. What they may not realize is that those segmentation strategies established prior to 2008 may no longer be as valid in the wake of the financial crisis and migration to more digital forms of banking.

To address these concerns, BAI Research, recently introduced The New Dynamics of Consumer Banking Relationships, a study sponsored by Cognizant and SAS that segments customers according to their personal financial attitudes and age, as opposed to the typical segmentation schemes based solely on income, age and other broad demographic factors. Building upon a previous BAI Research study, The Quest for Deposits, conducted in 2003, we have developed five new categories that better fit today’s environment: Marginalized Middles (36% of total), Struggling Techies (21%), Disengaged Skeptics (18%), Satisfied Traditionalists (18%) and Sophisticated Opportunists (7%).

While most of these categories roughly mirror those in The Quest for Deposits, the “Struggling Techies” group can be singled out as a new element. The youngest (typically 21 to 34 years of age) and lowest income customers, Struggling Techies display a knack for technology and are interested in innovative products and services; 91% use online banking and 45% mobile banking, for example, the highest percentages of any segment (see chart, “Struggling Techies Like Technology”). Although their low deposit, loan, and investment balances might encourage many banks to focus less attention on them, Struggling Techies represent potentially desirable customers as they move forward in their life cycle and as their loan and investment needs increase.

Cross-selling Opportunity

Aside from introducing updated customer segments, The New Dynamics of Consumer Banking Relationships reinforces the need for segmentation strategies generally in banking today. Given the pressures of recent regulatory restrictions on fee income and the extraordinarily low interest rate environment that depresses spread income, the focus for many retail organizations has shifted from acquisition and origination to capturing more share of wallet from existing customers. On that score, our consumer research validates that customers are receptive to cross-sell approaches.

One of the surprising results of our study, in fact, is that consumers remain open to advice and counsel from their primary financial institution (FI), despite all the negative publicity bombarding banks in general since 2008. Customers who said that their primary bank proactively suggests financial products to them reported the highest level of satisfaction with their bank. Conversely, those whose primary bank rarely recommended products or services reported the lowest satisfaction scores. In addition, the customer segments that reported the most cross-selling offers were also more likely to consolidate all or most of their future business with an institution who offers them incentive to do so.

On the other hand, banks have clearly failed to exploit this opportunity in the past. Our study found that banks only capture roughly 46% of a customer’s total deposit balances and about 10% of their total loan balances. Banks now seem to be aware of this deficiency and have chosen customer segmentation strategies as a remedy. A BAI Research “Demand Pulse” study fielded in February 2012 found that the top investment area for marketers and product development at banks over $2.5 billion in assets was, in fact, segmentation strategies. For banks under $2.5 billion, it was relationship packaging and pricing strategies followed closely by segmentation strategies.

The key is for these segmentation strategies to go beyond the rudimentary marketing programs which appear to be the norm right now. Segmentation should be communicated to all employees to ensure the message and goals are consistent and understood. Once this is accomplished, segmentation can be leveraged in marketing efforts and channel management as well as front-line sales efforts. Essentially, segmentation strategy provides banks with an opportunity to “fine-tune” channel and sales configuration to the appropriate customer mix. Each group will respond differently to different approaches from their bank.

In our study, we not only collected current data about the products, balances, and services owned and used by consumers, but also the attitudes they have about their primary FI and the banking industry as a whole. These attitudes became the main driver (along with age and income) in the development of the study’s five segments. The attitudes also helped establish a deeper understanding of customer needs, which will help banks generate higher share of wallet and customer satisfaction.

Here are the five customer segments identified in The New Dynamics of Consumer Banking Relationships and our suggestions as to the best way to approach each:

Marginalized Middles –The largest group, they are the least satisfied with their primary financial institution and could benefit from some personal banker assistance. The relationship benefits of easy-to-understand accounts could also resonate with this group.

Struggling Techies – The youngest group with the lowest income. Heaviest online/mobile/P2P users. Very receptive to consolidating all of their products and balances if offered the right product or reward. Averse to fees but have an immense liking for all things technological. Overall, this segment can be approached in a relatively hands-off manner.

Disengaged Skeptics – Least satisfied of all groups with customer service at their primary financial institution. High concentration in “other” FIs, which include brokerage firms and other non-traditional accounts. Since this is the second oldest segment, competitive products could be marketed as less risky than nonbank offerings for individuals heading towards retirement.

Satisfied Traditionalists – The oldest segment with the lowest deposit share of wallet. Least likely to utilize online/mobile/debit services and not at all receptive to consolidating all of their business with their primary financial institution for the right product or reward offering. This is the most highly concentrated group at community banks. Products and services that manage cash flow with low risk could catch the attention of this segment.

Sophisticated Opportunists – Highest income group that needs to be treated well. They are very knowledgeable about the banking world and comfortable making decisions regarding their finances. Utilization of mobile and debit reward services is higher than most other groups. Need to provide them with the right tools, such as online financial planning and investment management, to enable them to manage their own finances. This segment is also most receptive to consolidating with one financial institution so product packaging (particularly rewards) is important to them.

As an example of the potential power of segmented marketing, consider that Struggling Techies and Sophisticated Opportunists together represent just over one-quarter of a large bank’s customer franchise. A 4% gain in share of loan wallet from Struggling Techies would translate into 46% growth in loan portfolio for this segment. A 5% gain in share of loan wallet from Sophisticated Opportunists translates into 26% growth in loan portfolio for that segment.

Taken together, focusing on just over one-quarter of the customer base and improving only by 1% gain in total share of loan wallet would translate into overall bank loan portfolio growth of 13% for a large-network bank – not bad for an environment where growing loan portfolios is the number one issue for financial institutions of all sizes. Thirteen percent loan growth would represent a banner year for most FIs and would remove some of the worry about expense control and replacing lost fee income due to regulations.

We hope the renewed emphasis in customer segmentation will translate into bankers proactively recommending products and services to their customers, thereby improving customer satisfaction and achieving larger share of wallet for those who understand their customer segments.